As the end of 2018 quickly approaches, many small business owners are reviewing records in preparation for filing tax returns. The tax reform bill, known as the Tax Cuts and Jobs Act, enacted sweeping changes to the Internal Revenue Code that will apply to 2018 returns. It is important that year-end planning address these changes.
Unlike changes to the individual tax structure, which are temporary and somewhat piecemeal, the changes to the business tax structure are permanent and relatively comprehensive.The new tax law is complex and most business owners will look to their accountants and tax professionals for help in addressing the changes that apply to tax returns.
Here are five of the changes found in the new tax law that small business owners should review with their tax professionals:
- Lowers the corporate income tax rate permanently to 21 percent, starting in 2018.
- Establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers. The pass-through deduction was included as an individual income tax provision, which means that it expires at the end of 2025, along with the other individual income tax reductions. A more business-friendly entity may be the right entity choice decision and should be part of any review.
- Implements a territorial tax system that taxes businesses only on income earned within the U.S.
- Allows full and immediate expensing of short-lived capital investments for five years.
- Increases the section 179 expensing cap from $500,000 to $1 million. Newly qualifying property that can be expensed now includes:
- a) Tangible personal property (e.g., furniture and appliances) used predominantly to furnish lodging or in connection with furnishing lodging.
- (b) Improvements to nonresidential real property (e.g., roofs; heating, ventilation, and air-conditioning; fire protection and alarm systems; security systems).
Source: Tax Foundation
Almost all these and the many other changes in the new tax law are complicated and may affect companies differently. In some cases a restructuring of the current business entity is warranted. Small business owners should consult their tax professional to understand the impact and scope of these changes before making decisions about future investment opportunities.
Charles P Myrick CPA, specializes in accounting and business advisory services for new business start ups and entrepreneurs. If you are a small business owner, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.